Accounting Cycle & Related Concepts

Flashcards covering key definitions, processes, and rules related to the accounting cycle, journalizing, trial balances, adjusting entries, and closing entries.

What is the accounting cycle?

The process by which a company records business transactions and ultimately aggregates and summarizes them in financial statements.

List the nine standard steps in the accounting cycle in order.

1) Analyze transactions, 2) Journalize transactions, 3) Post to the general ledger, 4) Prepare the unadjusted trial balance, 5) Record adjusting journal entries (AJEs), 6) Prepare the adjusted trial balance, 7) Prepare financial statements, 8) Record closing entries, 9) Prepare the post-closing trial balance.

State the basic accounting equation.

Assets = Liabilities + Equity.

Define assets and give two examples.

Probable future economic benefits obtained or controlled by an entity as a result of past transactions or events; examples include cash and inventory.

Define liabilities and give two examples.

Probable future sacrifices of economic benefits arising from present obligations to transfer assets or provide services; examples include accounts payable and notes payable.

What is stockholders’ equity?

The residual interest in the assets of an entity that remains after deducting liabilities; essentially the net assets.

Name the three major components of stockholders’ equity.

Contributed capital, accumulated other comprehensive income (AOCI), and retained earnings.

Provide the formula for ending retained earnings.

Ending RE = Beginning RE + Revenues + Gains − Expenses − Losses − Distributions to owners (dividends).

What is a transaction in accounting terms?

An economic event that involves a change in an asset, liability, or stockholders’ equity account.

Why must every transaction affect at least two accounts?

Because the accounting system is double-entry; debits must equal credits so the accounting equation always balances.

Give the expanded accounting equation including temporary accounts.

Assets = Liabilities + Contributed Capital + AOCI + Beginning Retained Earnings + Revenues & Gains − Expenses & Losses − Dividends Declared.

How does US GAAP define revenues?

Inflows or other enhancements of assets or settlements of liabilities from ongoing major operations.

How does US GAAP define expenses?

Outflows or other consumption of assets or incurrences of liabilities from ongoing major operations.

Differentiate gains from revenues.

Gains are increases in equity from peripheral or incidental transactions, whereas revenues stem from core operating activities.

Differentiate losses from expenses.

Losses are decreases in equity from peripheral or incidental transactions, whereas expenses arise from core operating activities.

What are distributions to owners?

Decreases in equity resulting from transferring assets, rendering services, or incurring liabilities to owners (e.g., dividends).

What does journalizing a transaction mean?

Officially recording a transaction in the general journal so it can ultimately appear in the financial statements.

Define an account in bookkeeping.

An individual record of increases, decreases, and the balance of a specific asset, liability, equity, revenue, or expense item.

Chart of accounts

A numerical listing that assigns account names and numbers, making it easier to locate accounts in the ledger.

State the normal balance for an asset, liability, and revenue account.

Asset: Debit; Liability: Credit; Revenue: Credit.

List the four standard components typically shown in a journal entry.

Date, debited accounts (listed first), credited accounts (indented), and a brief description or explanation.

What is a general ledger?

A consolidation of all accounts maintained by a company, each showing individual increases, decreases, and balances.

Posting

The process of transferring information from journal entries to the individual ledger accounts.

What is a T-account and why is it used?

A simplified illustration of a ledger account shaped like a ‘T’; it visually separates debits (left) and credits (right) for easy analysis.

What is an unadjusted trial balance?

A listing of all accounts and their debit or credit balances prepared before adjusting entries are made.

Name two errors a trial balance cannot detect.

A completely omitted transaction and a journal entry recorded with the correct debit and credit totals but wrong amounts/accounts.

How does cash-basis accounting recognize revenues and expenses?

Revenues are recognized when cash is received; expenses when cash is paid.

How does accrual-basis accounting recognize revenues and expenses?

Revenues when earned and expenses when incurred, regardless of cash receipt or payment.

Under cash vs. accrual, what is the impact on net income when services are provided on credit?

Cash basis: no immediate impact; Accrual basis: net income increases.

Why are adjusting journal entries (AJEs) necessary?

To ensure all revenues and expenses are recorded in the correct period, fulfilling accrual accounting requirements prior to financial statement preparation.

Name the four major categories of AJEs.

Deferred expenses, deferred revenues, accrued revenues, and accrued expenses.

Deferred expense

An expense for which cash was paid before the cost has been incurred; initially recorded as an asset.

Describe the AJE for a deferred expense as time passes.

Debit the related expense account and credit the prepaid (asset) account to move the used portion to expense.

What is a deferred revenue?

Cash received before the related revenue is earned; recorded as a liability called unearned revenue.

Describe the AJE for deferred (unearned) revenue when it is earned.

Debit the liability unearned revenue and credit the related revenue account.

What is an accrued revenue?

Revenue that has been earned but for which cash has not yet been received.

AJE for accrued revenue.

Debit an asset and credit a revenue account

What is an accrued expense?

An expense that has been incurred but not yet paid in cash or recorded.

State the AJE for an accrued expense.

Debit the appropriate expense account and credit a liability (e.g., salaries payable).

Depreciation

The systematic and rational allocation of the cost of a long-term tangible asset to expense over its useful life.

How is depreciation recorded?

Debit depreciation expense and credit accumulated depreciation (a contra-asset account).

Amortization

The systematic allocation of the cost of an intangible asset to expense over its useful life.

What is the purpose of an adjusted trial balance?

To list all accounts and their balances after AJEs, ensuring debits still equal credits prior to financial statement preparation.

List the typical order in which financial statements are prepared.

1) Income statement, 2) Statement of changes in stockholders’ equity, 3) Balance sheet, 4) Statement of cash flows.

Differentiate temporary and permanent accounts.

Temporary accounts (revenues, expenses, gains, losses, dividends) are closed each period; permanent accounts (assets, liabilities, equity) carry their balances forward.

Briefly outline the closing process for revenue and expense accounts.

1) Debit each revenue and credit income summary, 2) Credit each expense and debit income summary, 3) Close income summary to retained earnings, 4) Close dividends to retained earnings.

What is the purpose of a post-closing trial balance?

To verify that debits equal credits after closing entries and to ensure only permanent accounts with balances remain open for the next period.